private equity dental services organizations: corporate...
TRANSCRIPT
Private Equity Dental Services Organizations:
Corporate Practice of Medicine, Fee-Splitting,
Regulatory Compliance
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WEDNESDAY, JULY 10, 2019
Presenting a live 90-minute webinar with interactive Q&A
Michele A. Masucci, Partner, Nixon Peabody, New York
Justin Puckett, President, MB2 Dental Solutions, Dallas
Michael I. Schnipper, Partner, Nixon Peabody, New York
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Private Equity Dental Services Organizations: Structuring the Deal –Transactional Issues and Regulatory Compliance
Michele Masucci, Partner, Nixon Peabody LLPJustin Puckett, President, MB2 Dental SolutionsMichael Schnipper, Partner, Nixon Peabody LLP
July 10, 2019
— Dental service organizations (DSOs), also known as dental
support organizations, are management service companies that
provide or administer business support services to dentists and
dental practices.
— Some examples of the services DSOs provide include but are not
limited to human resources, marketing, billing and collection,
space and equipment rental, compliance, accounting, and vendor
management.
— DSOs can be an internal management organization, but most are
third-party management companies that contract with dental
practices.
What is a Dental Service Organization?
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— DSOs provide their services to licensed dentist(s) who own a
professional entity (either a professional corporation (PC) or
professional limited liability company (PLLC) (professional entity)).
• The professional entity employs dentists and all licensed health care
providers.
• The professional entity holds all clinical assets, dental records, and
payor contracts.
— The DSO is a lay entity—— typically an LLC.
• DSOs may have dentists and non-dentists as investors.
— DSOs and the professional entity establish a business relationship
regarding non-clinical, administrative services through
administrative services agreements.
Typical Structure: Dental Services Organizations
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Why all the interest in DSOs?
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— The dental market continues to expand.
• The dental market was $73 billion in 2017, according
to investment bank Harris Williams & Co.
— More consolidation leads to bigger chains of
dental practices, that in turn can create greater
efficiencies.
— This consolidation combined with these greater
efficiencies can equate to greater growth which in
turn can lead to quicker returns on investment.
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Factors that Contribute to Private Equity Firms Considering and Entering into a DSO Arrangements
— With costs continuing to rise, DSOs can provide
the infrastructure, recruitment, marketing, capital,
and administrative support functions that relieve
the high administrative costs and burden on
smaller dental practices.
— A DSO can make a dental practice more efficient
and allow the practice easier access to expand.
— DSOs allow dentists to spend more time on clinical
services and less time on administrative tasks.
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Factors That Contribute to Dental Practices Considering and Entering into DSO Arrangements
— Private equity has been pouring money into the
dental field.
— KKR & Co. bought a 58% stake in Heartland
Dental, a DSO, that valued the company at $2.8
billion.
— Other investment firms such as Leonard Green &
Partners and Berkshire Partners are also buying
DSOs.
— As the market continues to expand, private equity
firms are all scrambling to get a piece of the pie.
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Private Equity and Dental Practices
Practice
(CPOD State)
Typical Private Equity Transaction Structure
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Holding Company
Operating Company
(DSO)
Practice(s)
(non-CPOD
State)
Rollover Dentists
Dr. Owner
ASA
PE
Investor(s)
In jurisdictions that restrict Corporate Practice of Dentistry (CPOD), a
transaction structure may include an investor-owned DSO.
— Non-clinical assets are transferred to the DSO, which provides
business and financial management services.
• Must transfer sufficient value to the DSO to attract the desired level of
private equity investment, including through a long-term administrative
services agreement (ASA).
The professional entity enters into ASA with the DSO, and the DSO
collects fees from the professional entity in consideration for
administrative and management services.
— Licensed dentists own the professional entity, which holds all
clinical assets.
— Management fees must be “fair market value.”
Transaction Structure: Dental Services Organizations
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— Authority of the professional entity
— Complying with state statutory and regulatory restrictions
• Example: Fee-Splitting—many states have adopted prohibitions against
fee-splitting (some broader than others)
— Selection and ownership of medical equipment
— Control and supervision of clinicians—clinicians continue to make
decisions with respect to the delivery of patient care
— Limitations on restrictive covenants, particularly with respect to
clinical employees (following applicable state law)
Transaction Structure: Additional Considerations
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— Private equity looks at the same corporate and transactional
diligence as other acquirers, but has an additional strong focus on
future earnings and growth.
• Reimbursement considerations and diligence for private equity is largely
focused on return on investment of the transaction.
• Some private equity firms have a greater focus on health care regulatory
compliance issues and others rely more heavily on outside consultants
and attorneys regarding the diligence process.
— Thus, focus on regulatory diligence is specifically targeted on
higher risk areas, including:
• Compliance programs and HIPAA compliance
• Billing and coding compliance
Distinct Due Diligence Considerations
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Compliance program review and assessment should include:
— Interviews of compliance officers.
— Review of any past, present, or anticipated future regulatory or enforcement
actions (i.e., existing Corporate Integrity Agreement (CIA), ongoing
investigations, patient, payor, whistleblower or other litigation that could indicate
current or future potential risk).
HIPAA compliance review and assessment should include:
— Review HIPAA policies and procedures. (Do they exist? Any key policies and
procedures missing?)
— Review existing business associate agreements (BAAs) and confirm that BAAs
are in place where necessary.
— Confirm whether there are any previous, pending, or threatened Office for Civil
Rights (OCR) investigations or audits.
Due Diligence: Compliance Programs and HIPAA Compliance
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Billing and Coding Compliance
— Consider engaging an expert.
• If third-party experts/consultants are engaged (e.g., valuation firm),
consider having them engaged via legal counsel to preserve
attorney/client privilege.
— Review random sample of medical records to ensure that
diagnosis and procedures are accurately and appropriately coded.
— Review same for adherence to coverage policies and procedures.
— Review denials to identify trends and issues with billing practices.
Due Diligence: Billing and Coding Compliance
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Responding to Due Diligence Risks
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Representations and warranties, indemnification, survival
periods, hold-back, escrow, purchase price adjustment, etc.
Pre-closing remediation (i.e, self-disclosure, affirmative
reporting, contract revision). Consider:
— Do the corporate records prove that “former shareholders” are truly “former”?
— Do circumstances justify migrating assets to a management company even prior
to eliciting a private equity partner?
— Can other issues be addressed ahead of time?
— For smaller organizations lacking a compliance plan and a compliance officer,
can policies and procedures be added prior to going to market?
— Do Stark and other regulatory matters, including potential pre-deal self-
reporting, apply?
Representation and Warranty Insurance
Private Equity Considerations:
— Typically does not want to manage day-to-day operations of the entity
— May want designees on board or veto rights over extraordinary actions to
protect its investments
— Reserved powers
— CPOD prohibitions, if any, may determine how much control the private equity
firm can exercise
Balancing Private Equity and Clinical Control:
— Physician Control
• Board representation
• “Relationship of the Parties” contractual provisions
• Clinical Board Committee
• Joint Operating Committee
Ensure any governance structure complies with applicable state
CPOD
Governance Issues
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What is “rollover equity”?
— In lieu of cash proceeds, equity holders in the
target company (such as founding dentists and
other key members) take a portion of their sale
consideration in the form of equity that is “rolled
over” into the new DSO.
Rollover equity helps ensure that the
interest of the key members of the target
practice continue to be aligned with the
incoming private equity investor.
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Use of Rollover Equity
Use Stock Transfer Restriction
Agreement between DSO, practice and
practice equity owners.
— Allows DSO to approve any future owner of the
professional entity
Employment Agreements with Practice
equity owners
— Restrictive covenants (non-compete, non-
solicitation, etc.; provided, however, that such
covenants are drafted in compliance with relevant
state statutes and regulations)
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Managing “Rogue” Dentist Shareholders
— How do you structure the transaction so founders retain
sufficient “skin in the game”?
— Will the founder in a region be the DSO’s business
development lead?
— Will the founder in a region have veto power over new
practices?
— Is there a business imperative for sub-DSO’s?
— To the extent there is retained equity, is there a put/call?
Unique Considerations In Work With Founders
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CPOD Doctrine
Many states have some form of CPOD either
through a statute or case law.
CPOD imposes restrictions on/creates
requirements regarding:
— Employment of professionals
— Ownership
— Fee-splitting
— Active practice
CPOD violations typically occur when a dentist
unintentionally provides services through an
improper business entity (PC controlled by a
DSO) rather than a professional entity (controlled
by the dentist).
Agreements between dentists and DSOs
should define:
— The term of the arrangement
— How fees are exchanged
— Who has control over clinical decisions
— Who oversees clinical and non-clinical employees
State regulators, dental board, former
sellers, patient class action suits,
competitors, or payors can challenge
DSO and PC agreements.
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How can DSO Agreements Comply with CPOD?
Dentists are prohibited from accepting or tendering rebates or split fees
in business dealings between dentists and any third party.
— For example: A dentist who pays for advertising or marketing services by sharing a
portion of the professional fees collected from prospective or actual patients with the
advertiser has engaged in fee splitting.
— For example: A dentist who offers dental treatments or procedures with “social
coupons” (i.e., Groupon) has engaged in fee splitting if the business arrangement
allows the coupon marketing service to collect the fee from the prospective patient and
provide the remaining balance to the dentist.1
Each state may have its own fee-splitting prohibitions in addition to ones
established by the American Dental Association Code of Professional
Conduct.
Impacts structure of Management (Administrative) Services Fee—some
states prohibit percentage fee arrangements.
Fee-Splitting Prohibitions
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1American Dental Association. “Principles of Ethics Code of Conduct of Professional Conduct” Section 4.E.1.
Federal Anti-Kickback Statute
— Intent-Based Criminal Statute
— Safe Harbors
• Group practice
• Employment Personal Services
• Space/Equipment Lease
State Fraud and Abuse Laws
— Medicaid Fraud Laws
• Billing Medicaid for unnecessary procedures,
procedures that were never performed, or intentionally
substandard work, and
• Disregarding ethical treatment standards.
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Anti-Kickback Statutes
Dentists are physicians for purposes
of the Stark Law.
Under Stark law, a dentist may not refer
Medicare or Medicaid patients to a designated
health services entity where the dentist or
immediate family member has a direct or
indirect financial relationship, unless an
exception applies.
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Stark Laws (Physician Self-Referral Law)
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State-by-State Regulatory Issues
Some states have specific regulations
governing DSOs. For example:
— Florida’s statute allows dentists to contract with DSOs for
administration, human resources, marketing, and
consultations about increasing productivity.
— Nebraska requires dentists to practice and advertise under
his or her own name.
— North Dakota allows non-dentists to own up to 49% of a
dental practice, but non-dentists cannot interfere with clinical
decisions.
— Kansas and Texas require DSOs to register annually with
the Secretary of State.
— Illinois requires each dental office location to register with
the Secretary of State.
— Tension between best practices and practice
autonomy
— Creating a corporate culture
— Integration challenges: bringing on new practices
• Stock v. asset deals and payor contracting
• Credentialing
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Operational Challenges
New Regulation Risk: Drug Diversion
“Diversion means the transfer of any controlled substance
from a licit channel to an illicit channel of distribution or
use.” Chapter 961 Uniformed Controlled Substances Act.
Over 40% of patients are prescribed opioids following a
tooth extraction, with an even higher 61% of adolescents
being prescribed opioids.1
Dental providers found to be only behind primary care
physicians as the leading prescriber of immediate release
(IR) opioids, particularly hydrocodone and oxycodone.
Dentists alone prescribe 1 to 1.5 billion doses of IR
opioids annually.2
1) Baker, JA et. al. JAMA 2016, 315:1653-1654
2) Tufts Health Care Institute. The Role of Dentists in Preventing Opioid Abuse. Tufts
Health Care Institute Program on Opioid Risk Management. 12th Summit Meeting.
Executive Summary. Boston.
According to the
American Dental
Association, Dental
providers should be
wary of potential
diversion
behaviors:
— False symptoms
— Doctor shopping
— Multiple fraudulent
phone-in’s
— DEA# theft
— Patient ID theft
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Dental providers can use the following tools to
prevent drug diversion in his/her office:
— Patient Screening/Verification/Intake and Patient Charts
— Controlled Substance Monitoring Databases
— Physical Assessment
• Check the patient’s nose—the most common route of drug abuse is
nasal ingestion.
• Check the patient’s eyes for any pupillary construction.
• Check for any track marks.
Opioid Diversion in the Dental Practice
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Dental providers should incorporate the following best
practices into their care of the patient receiving opioids
for the treatment of acute dental pain:
— Providers should conduct and document a medical and dental history and a physical
exam. If opioids are prescribed, the initial evaluation should include assessment and
review of current and past medication.
— Providers should administer non-steroidal anti-inflammatory drugs (NSAIDs) as first-
line analgesic therapy, unless contraindicated.
— If an opioid is administered, the dose and duration of therapy should be for a short
period, and for conditions that typically are expected to be associated with severe
pain.
— The Centers for Disease Control and Prevision guidelines suggest that most patients
will not need to take opioids for longer than 72 hours following most surgical
procedures.
— State regulations need to be considered.
Opioid Diversion in the Dental Practice
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Private equity investors have recently been targeted by
the Department of Justice (DOJ) as defendants in False
Claims Act actions.
— United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC dba Patient Care
America et al., No. 15-CV-62617 (S.D. Fla.)
• Among other complaints, the DOJ alleged the PE fund directly funded certain
marketing schemes that were, in reality, illegal kickbacks.
— United States ex rel. Martino-Fleming v. South Bay Mental Health Center, Civ. Action
No. 15-13065 (D. Mass.)
• Alleging that, because the PE fund was directly involved in the operations of the
facility that the PE can be held liable for the submission of false claims.
Does this signify a shift in the DOJ’s enforcement
approach, or is this just the result of facts specific to
these cases?
Recent Enforcement Trends Against Private Equity Investors
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Private equity firms generally purchase “portfolio
companies” with the intention of increasing the
portfolio companies’ value, realizing a positive return,
and then exiting the investment.
Exits usually occur between three (3) and seven (7)
years following the initial investment.
Exit Strategies:
— Initial Public Offering (IPOs)
— Sales to a third party (usually exercising drag-along rights)
Private Equity Exit Strategies
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Michele Masucci
Partner, Nixon Peabody LLP
516-832-7573 [email protected]
Justin Puckett
President, MB2 Dental Solutions
972-869-3789 ext. 129 [email protected]
Michael Schnipper
Partner, Nixon Peabody LLP
516-832-7518 [email protected]
Questions? Contact Us!
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